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Internationalization of the yuan can help deepen China’s financial and capital markets and aid rebalancing of the nation’s economy over the medium term, said Thomas Byrne, a senior vice president for sovereign risk at Moody’s Investors Service.

"It’s a long process" for the currency to be made more usable overseas, Byrne said at a conference in Beijing today. "China’s approach to gradually liberalize its capital market is probably a healthy approach."

China, which holds the world’s biggest foreign-exchange reserves, has boosted the use of the yuan overseas since the 2008 financial crisis to help reduce exchange-rate risks and develop an alternative to the U.S. dollar as a reserve currency. The government allowed Hong Kong to establish an offshore yuan market and has expanded trade settlement agreements and currency swaps with Asian nations to create more channels for the yuan to circulate outside the mainland.

A more market-based exchange rate and liberalization of interest rates would also contribute to addressing imbalanced growth, Byrne said. China’s government has pledged to lessen its dependence on investment and exports and increase the role of consumption in the economy.

Greater Yuan Role

President Nicolas Sarkozy has been trying to coax China into accepting a greater role for its currency during France’s chairmanship of the Group of 20 nations that ends this month. The discussions are part of efforts to limit global economic imbalances and avoid another financial crisis.

Sarkozy wants the yuan included in the International Monetary Fund’s Special Drawing Rights system. The SDR is a unit of account derived from the value of the dollar, yen, pound and euro used in IMF lending and currency reserves.

Jim O’Neill, chairman of Goldman Sachs Asset Management, said the lack of a clear announcement of a date for the yuan’s participation in the currency basket in the communiqué after the G-20 summit in Cannes last week may reflect “some divisions amongst key participants.”

Setting a specific target date for the yuan’s inclusion “would have implied an acknowledgment of a clear path toward effective convertibility of the yuan into a major currency,” O’Neill wrote in a Nov. 7 report. “This would have had profound consequences for Chinese capital markets and investors.”

The G-20 statement instead stated that further analysis would be undertaken with the possibility that the SDR basket would be redefined in 2015 or possibly before, O’Neill said.

O’Neill’s Hunch

“It would be my hunch that France would have been pushing for a definitive date, China would be OK with that, but not with a public commitment to a precise date for convertibility and the U.S. would not support any statement without such a plan,” O’Neill wrote.

Premier Wen Jiabao last month reiterated the government’s commitment to gradually push ahead with convertibility of the yuan and internationalization of the currency. Neither Wen nor other policy makers including People’s Bank of China Governor Zhou Xiaochuan have publicly given a timetable.

The yuan is now only convertible on the current account for trade purposes. The government still controls transactions on the capital account for investment purposes.